Wednesday, December 20, 2006
Generally speaking, I don't see much information on the web for those who become consultants mid-year. For example, IRS doesn't clarify if covered by a retirement plan at work for part of the year constitutes eligibility to make other contributions or not.
I quit my job late in the year effective Dec 10, and have $1,200 of consulting income since then. I am tempted to just ask the client to pay me next year so I don't have to get into making SS payments, set up a SEP-IRA etc. But if I could consider myself not covered by a retirement plan, it would be neat to fund a deductible IRA this year.
The rules and regulations that apply to self-employment are the same whether you are self-employed for part of the year or for the entire year or even if you are concurrently an employee. Some tax items may be affected by the business start date, for instance, the amount of deduction for equipment purchases or the maximum pension contribution allowed.
Also, the important date is not when you left your job, but when you actively started to pursue self-employment . That is, when did you start to look for clients, or set up shop?
Generally, it is to your advantage to collect and claim the small amount of earned income and then deduct all business expenses against it. You will likely end with a loss in your new consulting business and that loss can be deducted from the wages at your former job. You did not say what your indie business is and so I am limited in the advice I can give. A tax pro tuned in to the needs of an indie would suggest something to you like looking at a deduction for a computer already in your home that you purchased a while ago for, let's say, $3,000. If on the start date of your solo venture you could have sold that used computer for $1,000 and you use that computer in your new business you may have a $1,000 equipment expense this year.
Many pension rules have recently changed. For self-employeds they are much more liberal and flexible than ever before. Having a pension this year from a former employer does nor preclude your having another pension as a self-employed. Your contribution amount is limited by the maximum allowed and net self-employed income.
You mention making SS payments, I assume by SS you mean Social Security. A self-employed pays Self-Employment [S-E] Tax. S-E tax is a combination of Social Security Tax (also known as the employee’s FICA) and Medicare tax. You may or may not have an S-E tax liability. It depends on total wages from your job as well as your net self-employed income.
You may get more info on S-E Tax by reading Feature #9, Taxes: Which ones and how much do I pay? on my site.
And, as always, read the book that can simplify your tax and financial life, AND save you money! SELF-EMPLOYED TAX SOLUTIONS .
Wednesday, December 6, 2006
I have become self-employed and would like to know if I need to file a DBA. I began sub-contracting wireless engineering services for a major contracting firm as a 1099 employee. Any information would be helpful as I am quite new to this game.
Congratulations on your new solo venture!
By the way, to clarify a term, as a self-employed you may call yourself a freelancer, or an indie, or a sub-contractor, or a free agent, but you can no longer call yourself an “employee.”
“Doing Business As” shortened to DBA, is needed only if you use a name other than your own as the name of your business. In that case you would register your “trade name” with the county clerk. The purpose of registration is to make sure that no two people in the same county use the same business name.
You can find a lot more info on being self-employed at http://www.junewalkeronline.com/ .
And, as always, read the book that can simplify your tax and financial life, AND save you money!
SELF-EMPLOYED TAX SOLUTIONS .